REFINANCE ACTIVITY SLIPS, BUT STILL REMAINS STRONGER THAN EXPECTED IN SECOND QUARTER

Cash Out Figures Have Not Been Higher Since Second Quarter of 1990

McLean, VA  – In the second quarter of 2006, 88 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least five percent higher than the original mortgage balances, according to Freddie Mac's quarterly refinance review. This percentage is up from the first quarter of 2006, when the share of refinanced loans that took cash out was a revised 86 percent, and is the highest since the second quarter of 1990.

"The staying power of refinance activity has been much stronger than we initially thought," said Frank Nothaft, Freddie Mac vice president and chief economist. "But borrowers are reacting to both incentives to cash out home equity through refinance and incentives to change their mortgage as they hit an interest rate adjustment. Freddie Mac estimates that $500 billion in first lien mortgages will adjust this year and another $650 billion in second liens will see at least one rate change this year.

"While still stronger than expected, the share of all mortgage applications that were for refinance did slip for the second consecutive quarter to 42 percent from 44 percent in the first quarter of 2006, according to Freddie Mac's Primary Mortgage Market Survey."

Freddie Mac continues to expect 30-year fixed mortgage rates to average a little more than half a percentage point higher in 2006 relative to 2005, and the average rate on one-year Treasury-indexed adjustable rate mortgages to rise by slightly more than one percentage point.

In the second quarter of 2006, the median ratio of old-to-new interest rate was 0.93. In other words, one-half of those borrowers who paid off their original loan and took out a new one had an interest rate on their old loan that was nearly seven percent lower than the new interest rate.

"The incentive to take cash out of home equity is partially driven by the rapid rise in short-term interest rates like the prime rate. Many borrowers have seen their rates on home equity lines of credit – which are tied to the prime rate – rise. Now they are consolidating those HELOC loans into a new first lien mortgage to reduce their mortgage payments," said Amy Crews Cutts, Freddie Mac deputy chief economist. "This quarter we saw $81.0 billion cashed out, up from a revised $74.1 billion cashed out in the first quarter of 2006. Cash out activity should remain strong throughout the rest of the year as interest rates are expected to continue to gently climb.

"Because rates on home equity lines of credit have risen to 8.25 percent or higher, borrowers who are looking for an inexpensive way to finance home improvements or business investments, or to consolidate high cost debt, are turning to cash-out refinance. These borrowers are often willing to refinance into higher rates on their first lien mortgages. As previously noted, we saw the median ratio of new mortgage rates to rates on the loan being refinanced rise by eight percent. This is the second consecutive quarter in which the median refinance borrower increased the rate on their first lien mortgage. For the 20 quarters prior to 2006, the median refinance borrower was reducing his or her first lien mortgage rate."

The Cash-Out Refinance Report also revealed that properties refinanced during the second quarter of 2006 experienced a median house-price appreciation of 33 percent during the time since the original loan was made, up from 31 percent in the first quarter 2006. For loans refinanced in the second quarter of 2006, the median age of the original loan was 3.2 years, about two months older than the median age of loans refinanced during the first quarter of 2006.

These estimates come from a sample of properties on which Freddie Mac has funded at least two successive loans. Transactions are further screened to verify that the latest loan is for refinance rather than for home purchase.  The Freddie Mac analysis does not track the use of funds made available from these refinances.

Notes:

¹Higher loan amount refers to loan amounts that were at least 5 percent greater than the amortized unpaid principal balance (UPB) of the original loan. "Lower loan amount" refers to loan amounts that were less than the amortized UPB of the original loan.

²Ratio of old to new rate refers to the ratio of the interest rate of the refinanced loan to the interest rate of the new loan.

These data can be found at www.FreddieMac.com/news/finance/. For more information, contact us at chief_economist@freddiemac.com

Freddie Mac is a stockholder-owned company established by Congress in 1970 to support homeownership and rental housing. Freddie Mac fulfills its mission by purchasing residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage-related securities and debt instruments in the capital markets. Over the years, Freddie Mac has made home possible for one in six homebuyers and nearly four million renters in America.

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